It's good to be back! Echoing some of the sentiment I noticed in the comments on this blog recently, it seems that us dividend growth investors have been hesitant to deploy capital over the last few months. I share those circumstances, albeit not totally because of expensive stocks. It seems that if any time was a good time to take a break from frugality and investing, the last few months were that time.
The DJIA is up over 1,000 points over just the last two months. At the beginning of June, the Dow Jones was sitting just above 12,000. As of this past Friday, the DJIA closed at 13,208. That's quite a climb, and if you missed the occasional dip due to eurozone concerns or stories of slowing growth you now find yourself in the precarious position of sitting on some cash with limited opportunities to invest it. I certainly don't have a giant warchest due to some decisions over the last couple months that I regret, but I do find myself with a little capital.
Valuation is extremely critical when considering whether or not to purchase a specific stock. It determines your overall performance on your investment including your total return and yield on cost. To be a successful dividend growth investor, one must not only consider company fundamentals, dividend security, yield, dividend growth metrics, sector allocation and the like before purchasing a stock but must also strongly consider the price you're going to pay for that stock. Even the best companies in the world can be too expensive, and if you pay too high a price, even for high quality, you will suffer for it in the way of reduced yield and a low overall return.
I believe in purchasing stocks in high and low markets, on a monthly basis as I receive capital from my day job. This has been my modus operandi since I started this journey, and will continue to be until I'm finished. I believe in just about every market there are overvalued securities and undervalued securities. I don't believe the market is completely efficient, and there will always be under-loved and under-followed stocks. When CNBC is clamoring for Wal-Mart Stores, Inc. (WMT) and interviewing the CEO and runs daily segments on what a wonderful stock it is, then you probably know that it's not a great time to purchase WMT. On the other hand, if you can't remember the last time anyone mentioned Archer Daniels Midland Company (ADM, Financial), then maybe it's a good time to review the company one again and re-familiarize yourself with its fundamentals.
I plan on deploying some capital either late this month or early in September as my cash balance grows to the point where I can make meaningful purchases. Some of the stocks that I currently find value in, even in this expensive overall market, are as follows:
Aflac Incorporated (AFL, Financial)
Aflac is a supplemental life and health insurance company that operates in the U.S. and Japan. It was beaten down tremendously over the course of the summer of 2011 and hasn't fully recovered since then. Being a financial stock in a post Great Recession world doesn't help, but the tsunami in Japan and concerns over its bond portfolio are the primary factors for its weakness over the last year. I believe this is a solid stock as a long-term holding, and if I didn't already have a healthy position in AFL, I would be adding at these levels. It currently trades for a P/E ratio of 8.39 and has a solid entry yield of 2.88%. The balance sheet is stellar and they have been engaging in moves to de-risk the bond portfolio in light of eurozone concerns.The 5-year dividend growth rate is 17.5%, which is very strong.
Archer Daniels Midland Company (ADM)
Archer Daniels Midland is one of the largest agricultural commodity companies in the nation. Its massive size gives it a strong distribution network, which helps the company create value for its shareholders. ADM currently trades at a P/E ratio of 14.14 and has a pretty decent entry yield of 2.70%. Although the yield isn't fantastic, they are due for a dividend increase for November's payout. ADM is highly exposed to any shifts in commodity pricing, so that makes them a little vulnerable. Overall, at $26 a share I'd be a buyer here. The debt/equity ratio at 0.4 is pretty strong and over time the size and scale of the business should allow room for organic growth and larger market share. This looks like a solid long-term holding. The 5-year DGR is 10.4%.
McDonald's Corporation (MCD, Financial)
McDonald's operates as one of the largest restaurant chains in the world. Through large economies of scale and strong growth opportunities abroad I feel there is plenty of great days ahead for MCD. Trading for a P/E ratio of 16.57, it isn't dirt cheap but it's a solid value for a brand name multinational business. The entry yield right now at at just over $88 per share is 3.17%. MCD has been growing dividends for 35 years, longer than I've been alive. The 5-year DGR is 20.4%, which is obviously very high. This is one of those companies I love to own a piece of because not only do I believe in them long-term, but I use their products often and it puts a smile on my face to know that I'm contributing to the success of one of my investments.
What about you? Where do you find value in this market?
Full disclosure: Long AFL, MCD, WMT
The DJIA is up over 1,000 points over just the last two months. At the beginning of June, the Dow Jones was sitting just above 12,000. As of this past Friday, the DJIA closed at 13,208. That's quite a climb, and if you missed the occasional dip due to eurozone concerns or stories of slowing growth you now find yourself in the precarious position of sitting on some cash with limited opportunities to invest it. I certainly don't have a giant warchest due to some decisions over the last couple months that I regret, but I do find myself with a little capital.
Valuation is extremely critical when considering whether or not to purchase a specific stock. It determines your overall performance on your investment including your total return and yield on cost. To be a successful dividend growth investor, one must not only consider company fundamentals, dividend security, yield, dividend growth metrics, sector allocation and the like before purchasing a stock but must also strongly consider the price you're going to pay for that stock. Even the best companies in the world can be too expensive, and if you pay too high a price, even for high quality, you will suffer for it in the way of reduced yield and a low overall return.
I believe in purchasing stocks in high and low markets, on a monthly basis as I receive capital from my day job. This has been my modus operandi since I started this journey, and will continue to be until I'm finished. I believe in just about every market there are overvalued securities and undervalued securities. I don't believe the market is completely efficient, and there will always be under-loved and under-followed stocks. When CNBC is clamoring for Wal-Mart Stores, Inc. (WMT) and interviewing the CEO and runs daily segments on what a wonderful stock it is, then you probably know that it's not a great time to purchase WMT. On the other hand, if you can't remember the last time anyone mentioned Archer Daniels Midland Company (ADM, Financial), then maybe it's a good time to review the company one again and re-familiarize yourself with its fundamentals.
I plan on deploying some capital either late this month or early in September as my cash balance grows to the point where I can make meaningful purchases. Some of the stocks that I currently find value in, even in this expensive overall market, are as follows:
Aflac Incorporated (AFL, Financial)
Aflac is a supplemental life and health insurance company that operates in the U.S. and Japan. It was beaten down tremendously over the course of the summer of 2011 and hasn't fully recovered since then. Being a financial stock in a post Great Recession world doesn't help, but the tsunami in Japan and concerns over its bond portfolio are the primary factors for its weakness over the last year. I believe this is a solid stock as a long-term holding, and if I didn't already have a healthy position in AFL, I would be adding at these levels. It currently trades for a P/E ratio of 8.39 and has a solid entry yield of 2.88%. The balance sheet is stellar and they have been engaging in moves to de-risk the bond portfolio in light of eurozone concerns.The 5-year dividend growth rate is 17.5%, which is very strong.
Archer Daniels Midland Company (ADM)
Archer Daniels Midland is one of the largest agricultural commodity companies in the nation. Its massive size gives it a strong distribution network, which helps the company create value for its shareholders. ADM currently trades at a P/E ratio of 14.14 and has a pretty decent entry yield of 2.70%. Although the yield isn't fantastic, they are due for a dividend increase for November's payout. ADM is highly exposed to any shifts in commodity pricing, so that makes them a little vulnerable. Overall, at $26 a share I'd be a buyer here. The debt/equity ratio at 0.4 is pretty strong and over time the size and scale of the business should allow room for organic growth and larger market share. This looks like a solid long-term holding. The 5-year DGR is 10.4%.
McDonald's Corporation (MCD, Financial)
McDonald's operates as one of the largest restaurant chains in the world. Through large economies of scale and strong growth opportunities abroad I feel there is plenty of great days ahead for MCD. Trading for a P/E ratio of 16.57, it isn't dirt cheap but it's a solid value for a brand name multinational business. The entry yield right now at at just over $88 per share is 3.17%. MCD has been growing dividends for 35 years, longer than I've been alive. The 5-year DGR is 20.4%, which is obviously very high. This is one of those companies I love to own a piece of because not only do I believe in them long-term, but I use their products often and it puts a smile on my face to know that I'm contributing to the success of one of my investments.
What about you? Where do you find value in this market?
Full disclosure: Long AFL, MCD, WMT
